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Earlier in the week, Bank of Canada Governor Stephen Poloz lowered rates from 0.75% to 0.50%. Given the financial media reaction, you would think Poloz had just sacrificed a puppy on national TV. Pundit after pundit, shit all over the decision. One of the Canadian National television networks trotted out our favourite Mr. Burns’s character to opine about the stupidity of this rate cut.

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CTV couldn’t even get someone to take the other side of Kevin O’leary’s negativity. All they managed to do was find a business professor who thought it was a bad decision for other reasons. In the interview, O’leary called it a ‘mistake in every measure.’

Well, I don’t want to crap too much over O’leary, but let’s just say, I am happy to be on the other side of his trade any day of the week.

Let’s just step back and think about Poloz’s move. Did he lower rates into negative territory? Nope, Canada was at 0.75% while most of the other developed markets has overnights at either zero, or in the case of most of Europe – negatitive. Did Poloz drive Canada’s borrowing costs below the Americans? Nope, Canada’s rates are still 50+ basis points higher than the US.

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The global economy is sinking fast. There is precious little growth, and the rate of acceleration of the recent decline does not seem to be abating.

I can’t remember the statistic, but something like 58 of the 60 major Central Banks are in the process of easing policy. Apart from the US (and maybe the UK) who are threatening to tighten monetary conditions, the rest of the world is desperately trying to kick start their anemic economies.

So how should Bank of Canada Governor Poloz set policy in this sort of environment? Should he stand arm in arm with the Americans as they tighten into the next slowdown? The last Central Bank that tried to fight the global easing trend was the ECB. For the longest time the Europeans wagged their fingers at the overly easy Americans, and then the Japanese. The ECB held tight, refusing to competitively devalue through quantitative easing. In doing so, they imported all the world’s deflation, saw their currency go through the roof, and then eventually had to lower rates into negative territory. Their “religion” about hard money caused them to suffer way more than should have been the case, and eventually caused them to lower rates way lower than should have been necessary.

Guys like O’leary will argue that a cheap currency or overly easy monetary policy encourages companies to be inefficient and ultimately hurts the economy. That might be a great theory, but with the massive amount of world debt, refusing to enter the global race to debase only causes a self reinforcing deflationary feedback loop. In the 1930s the countries that devalued first suffered way less than the countries who held tough, but ended up going later. Remember when it comes to modern day Central Banking, bar rules fighting apply – hit hard and hit first.

This idea that Canada should somehow withstand the massive trend towards lower rates over the past six months is just stupid. Apart from the problem with our housing market becoming even more overheated, there is absolutely no reason for Canada to have rates 50 to 75 basis points higher than the Americans. Their economy is the strongest in the world. Ours is suffering from the after effects of a global commodity crash. The Canadian Dollar will go down, but so what?

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The US dollar is strong against all other currencies. The Canadian dollar is just marginally weaker than most other currencies. As Canadians, we might think our currency is plummeting because generally we only measure it against the US dollar. Yet in reality, the Loonie is moving in lock step with all the other world currencies.

Let the Americans tighten into this global economic slowdown. Ever since the 2008 credit crisis the mistakes have all been made by countries raising rates too early, not the other way round. Chalk me up as a Stephen Poloz fan. Anybody who pisses off Kevin O’leary must be doing something right…


Where’s my face?

Earlier in the year I remember reading all sorts of negative research pieces on Google. It had gone from being a hedge fund favourite to their whipping boy. Famed hedgies like Dan Niles were advocating shorting Google against going long stocks like Twitter, Yahoo or Apple.

Don’t ever forget one thing about hedge funds; they are like packs of 15 year old girls – they never travel alone. They herd quicker than a group of Wildebeests on the Serengeti when the lion approaches.

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So when Google blew through earnings expectations this morning, you know there was some serious pain in the hedge fund community.

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It is no surprise the gap higher was so violent. Hold on to your hats – we will see more moves like this (both up and down) in the coming days…

Thanks for reading and have a great wk-end,

Kevin Muir

the MacroTourist